Wise Money Decisions

I was looking through my site’s visitor logs and noticed that people continue to find my article on conforming loan amounts by searching “$729,725″ in google.  

I know what you’re thinking:

“Why are you telling me this?  You already told us last week that you were #2 on google for $729,725.  (in a sarcastic voice)  And nice work.  That’s got to be a highly competitive search term.”

I’m bringing it up again because I’m not number two anymore.  This time, I’m Numero Uno!  Number One on google!  Or as my friend eloquently put it after correctly spelling Onomatopoeia to win the sixth grade spelling bee, “Second place is for losers!” 

I know what you’re thinking, and let me respond.  It wasn’t me.  I’m not one of those people that says “my friend” when I’m really talking about me.  I never won the spelling bee.  I would never say second place is for losers.

Now for some analysis.  While the original article got me to second, I think the later post pointing out I was #2 on google actually pushed me to #1.  This post should solidify my spot.  I’m not an SEO expert but just to be safe it probably won’t hurt if I mention $729,725 a few more times.

$729,725.  $729,725. $729,725. $729,725. $729,725. $729,725. 

That should do it.   No one can take $729,725 from me now.

UPDATE MARCH 10, 2008 —- Fannie Mae and Freddie Mac have raised the conforming loan limits.  Go here for the update.

NOTICE FEBRUARY 26, 2008 —- TECHNICAL DIFFICULTIES

There have been a lot of readers visiting the recent post “Conforming Loan Limits and the Economic Stimulus Package.”  Unfortunately I have had some technical difficulties and the links to the post are temporarily not working.  I hope I can get it resolved by tomorrow.

As a temporary fix I am reposting the article here.

UPDATE:  The technical difficulties have been resolved.  The following post is identical to the earlier post “Conforming Loan Limits and the Economic Stimulus Package.” 

If you follow the news even a little, you have read about the ”economic stimulus” package, formally called the Economic Stimulus Act of 2008.  The Act was signed into law by President Bush on February 13. The stimulus package is designed to kickstart the flagging economy through, among other things, increasing the conforming loan limits.  What does this mean for you?

Background on Conforming Loans

There are two privately-owned government-sponsored corporations that help bring liquidity to the mortgage market.  Fannie Mae and Freddie Mac are willing to buy loans from lenders as long as the loans meet certain criteria.  Such loans are known as conforming loans.  Loans that do not meet the criteria are known as non-conforming loans. 

In order to be a conforming loan, the loan amount must be less than a certain threshold.  The threshold is adjusted each year.  The threshold for 2007 was $417,000.  If you obtained a mortgage in 2007 for $417,000 or less, you paid a lower interest rate.  If the amount of your mortgage was greater than $417,000, your loan was a “jumbo loan.”  Jumbo loans carry a higher interest rate than conforming loans because lenders cannot sell jumbo loans to Fannie Mae or Freddie Mac.  The interest rate difference typically ranges from 0.5% to 1.0%.

Economic Stimulus Package

The Economic Stimulus package allows Fannie Mae and Freddie Mac to increase the threshold loan amount to as high as $729,725, depending on the median cost of housing where you live.  The policy goal is to increase the number of homeowners with conforming loans and lower interest rates.  Lower interest rates translate into homeowners with lower mortgage payments and consequently more money to spend stimulating the economy (we’re told). 

Should You Rush to Refinance? Not So Fast

Does this mean all of us with nonconforming loans should rush out to refinance?  Probably not.  First of all, the Economic Stimulus package allows Fannie Mae and Freddie Mac to increase the conforming loan limit, but it does not require them to increase it.  Shortly before the Stimulus Act was signed into law, Fannie Mae and Freddie Mac had announced that the 2008 threshold amount would not increase from its 2007 level.  There is uncertainty whether they will now do an about-face and increase the threshold after all.  Remember, while Fannie Mae and Freddie Mac are government-sponsored, they are privately-owned and must do what’s best for their shareholders. 

Read the rest of this entry »

If so, you may be entitled to a refund due to a class action lawsuit filed against De Beers.  A class action is one of those lawsuits where the lawyers make a few million bucks while you, the consumer that’s been harmed, receives fifty cents off your next video rental.  Seems fair.

What the Lawsuit is About

De Beers is a company that mines and sells diamonds.  De Beers is accused of monopolizing diamond supplies, fixing diamond prices, and disseminating false advertising.  Rascals. 

They have been sued on behalf of everybody in the U.S. that purchased diamonds anytime between January 1, 1994 and March 31, 2006.  The class action lawyers and De Beers have proposed a settlement of the lawsuit.  You are part of the settlement unless you opt out.

What You’re Entitled To

Under the terms of the proposed settlement, $135,432,500 will be divided up among consumers that purchased certain diamonds in the U.S. between January 1, 1994 and March 31, 2006.  Each consumer is entitled to a pro rata share of the settlement.  Until all claims are received, it is impossible to know each consumer’s share.  Also, the payout for each consumer is capped.  If your pro rata share is greater than the cap amount, then you will receive only the cap amount. 

I don’t know how the cap amount is calculated.  It’s probably on the settlement website but I haven’t found it yet.  If someone finds it, please post it in the comments.  It would be nice to see how it’s calculated.

There is an example on the website explaining that the cap amount for a $2,000 engagement ring is $640.  That amounts to a 32% refund of the purchase price.  So perhaps the cap amount is 32% of your purchase price.  If you bought an engagement ring, a 32% refund is a big deal. 

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Today a friend told me how much he gives to his kids as an allowance.  It got me thinking about the ways I might use allowance to teach my kids about money. 

When I was a Little Jeff

When I was growing up my dad kept a spreadsheet in Lotus 1-2-3.  If you know what Lotus 1-2-3 is, then you might be older than me.  The spreadsheet calculated each kid’s allowance based on age and various other factors.  I’m not sure what the other factors were.  Dad, if you read this and if it’s no longer a trade secret, please feel free to disclose the other factors in the comments. 

A penalty was subtracted for leaving chores undone, disobeying, and other delinquent behavior.  The spreadsheet required just a few user inputs, and then automatically updated itself to calculate the allowance for each kid. 

Allowance was paid at irregular intervals.  It didn’t matter how often because the spreadsheet took into account the time elapsed since the last allowance.  The spreadsheet figured it all out. 

When it came time for allowance my dad printed out the spreadsheet.  We sat down as a family and my dad distributed each kid’s allowance.  My typical allowance would be about eight bucks.  It was never a round number because the spreadsheet was precise.  If the spreadsheet said $8.77, I got $8.77.  No rounding.

Each kid had a little cardboard bank.  My entire net worth was in the bank.  I liked to have a mix of coins: quarters, nickels, dimes, and pennies.  I was always short on dimes for some reason.  I tried to trade away quarters and nickels in exchange for dimes.  I would say to my brother: “I’ll trade you FIVE pennies for ONE dime.  You’re getting five and only giving up one.  I think you should do it.”  It worked until he got older. 

One of my brothers always had large penalties.  The penalty deductions would zero out his allowance and then some.  He had to put money back into the allowance pool.  To this day he jokingly insists he paid most of my dad’s mortgage.

No allowance was paid when you had a real job.  In fifth grade I got a paper route.  I never got allowance again.  It was a smart rule that kept my parents solvent through eight kids.

One Family Uses Capitalism

My friend told me of a family that used a free market system.  When a job needed to be done, the parents got the kids together and auctioned off the work.  Each kid was allowed to submit a bid.  The kid with the lowest bid won the right to do the job.  For example, the parents might auction off the right to take out the garbage for a week.  If the lowest bid was $5, then that kid would take out the garbage for a week and make $5 in the process.  Then they might auction off a harder job, like mowing the lawn.  The lowest bid might be $10.

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This blog is just a few days old.  It’s fun to track how people find it. 

After the post on the conforming loan amount, I noticed that somebody found the blog by searching for “$729,725″ on google.  My article was the second hit.  I never thought I’d be the second hit on anything this soon.  I proudly sent a brief email to a few people:

Copy and paste $729,725 into google and look what the 2nd hit is.

I received one congratulatory response:

Awesome!

And one sarcastic response:

I search for that number all the time.  Unfortunately, I always go to the #1 page….

Over at getrichslowly.org there is an interesting post discussing the Economic Mobility Project.  The idea behind the Economic Mobility Project is to research and analyze the social, economic, and human capital factors that impact one’s ability to move up the economic ladder over a generation.

Before reading the post I had never heard of the Economic Mobility Project.  The topic is an interesting one, and if I had more time I would read some of the group’s work. 

Do the Silver Spoons Stay Full?

Getrichslowly provides a summary of some key points from an Economic Mobility Project press release.  One piece of data really jumped out to me.  Getrichslowly says, “If you are born into wealth, you have a 23% chance of remaining wealthy.”  A little later, he quotes from the press release: “About one-third of those born into wealth remain wealthy.” 

There is a discrepancy between the numbers, but either way I found it very surprising that only 23% or 33% of those born wealthy would remain wealthy.  I would have expected a much higher number, maybe 80%.

College is Important for Those Born Into Wealth

I went to the press release to see what I could find.  It turns out that the press release actually states: “23 percent of those born into the top quintile that do not get a degree stay at the top as adults” (my emphasis).  That clears up the discrepancy noted above.   [UPDATE: Getrichslowly has updated his post to clear up the discrepancy.]  Meanwhile, “of Americans born into the top quintile who earn a college degree, 54 percent remain there as adults.”   54% compared to 23% is quite a difference.  You better go to college even if you’re born into wealth. 

Later the press release states: “36 percent of children born to parents in the top wealth quintile remain at the top as adults.”  The 36% number makes sense given the 23% and 54% figures.  If I’ve done the numbers right, it means that slightly more than half of those born into the top quintile do not get a college degree.  I find that slightly surprising, but not overly so.

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UPDATE MARCH 10, 2008 —- Fannie Mae and Freddie Mac have raised the conforming loan limits.  Go here for the update. 

If you follow the news even a little, you have read about the ”economic stimulus” package, formally called the Economic Stimulus Act of 2008.  The Act was signed into law by President Bush on February 13. The stimulus package is designed to kickstart the flagging economy through, among other things, increasing the conforming loan limits.  What does this mean for you?

Background on Conforming Loans

There are two privately-owned government-sponsored corporations that help bring liquidity to the mortgage market.  Fannie Mae and Freddie Mac are willing to buy loans from lenders as long as the loans meet certain criteria.  Such loans are known as conforming loans.  Loans that do not meet the criteria are known as non-conforming loans. 

In order to be a conforming loan, the loan amount must be less than a certain threshold.  The threshold is adjusted each year.  The threshold for 2007 was $417,000.  If you obtained a mortgage in 2007 for $417,000 or less, you paid a lower interest rate.  If the amount of your mortgage was greater than $417,000, your loan was a “jumbo loan.”  Jumbo loans carry a higher interest rate than conforming loans because lenders cannot sell jumbo loans to Fannie Mae or Freddie Mac.  The interest rate difference typically ranges from 0.5% to 1.0%.

Economic Stimulus Package

The Economic Stimulus package allows Fannie Mae and Freddie Mac to increase the threshold loan amount to as high as $729,725, depending on the median cost of housing where you live.  The policy goal is to increase the number of homeowners with conforming loans and lower interest rates.  Lower interest rates translate into homeowners with lower mortgage payments and consequently more money to spend stimulating the economy (we’re told). 

Should You Rush to Refinance? Not So Fast

Does this mean all of us with nonconforming loans should rush out to refinance?  Probably not.  First of all, the Economic Stimulus package allows Fannie Mae and Freddie Mac to increase the conforming loan limit, but it does not require them to increase it.  Shortly before the Stimulus Act was signed into law, Fannie Mae and Freddie Mac had announced that the 2008 threshold amount would not increase from its 2007 level.  There is uncertainty whether they will now do an about-face and increase the threshold after all.  Remember, while Fannie Mae and Freddie Mac are government-sponsored, they are privately-owned and must do what’s best for their shareholders. 

Read the rest of this entry »

Yesterday I provided an overview of the three ways to make money: labor, capital and gift.  I discussed the first way, labor.  Today I will discuss the remaining two ways: capital, and gifts.

What is Capital

Once you’ve made some money from your labor, you can invest and make money from capital.  The most common way is opening a savings account at a bank.  Other ways:  invest in stocks or funds, real estate, collectibles (art, stamps, baseball cards), or start a business.   Starting a business requires a combination of labor and capital.  Some businesses require high amounts of both, while other businesses may require more labor and less capital.

What’s Good with Capital

Generally, making money from capital requires less effort than labor.  It usually takes less time to manage your capital.  Your capital works even while you’re not.  For example, I own stocks of Japanese companies.  It’s nice to think they’re on the other side of the world making money for me while I’m asleep at night. 

Capital is taxed less than labor.  Not only is the tax rate lower, but there are also more tax planning opportunities to reduce your tax bill.  As mentioned above, I’ll post soon on the taxation of labor vs. capital.

How To Make More Money on Capital

Capital is scalable.  If you want twice the return, you can invest twice as much capital.  Or you can find ways to invest your money at a higher return.

Downsides of Capital

With all the advantages of capital, what downside could there be?  Just one.  It takes a lot of capital to make significant amounts of money.  Let’s take the stock market as an example.  Even if you find ways to achieve an average annual after-tax return of 15% per year in the stock market (not an easy feat), you need to invest about $600,000 bucks to generate enough return to live a middle class life in Silicon Valley!  (based on 2006 median income of $85,446)

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Last time I discussed my goal to be in a position to retire after a 20 year career.  To reach my goal I need to accumulate a large amount of money.  There are many ways to make money: jobs, savings accounts, stocks, mutual funds, real estate, start a business, receive an inheritance, etc.   I find it useful to categorize the different ways that money is made as follows:

• Labor
• Capital
• Gifts & Inheritance

Each of us makes money from all three categories.  For most people, the vast majority of their money comes from labor and a much smaller amount comes from the other two categories.  Over the next couple days I’m going to discuss the pros and cons of each category.  I will start with labor because it is the most familiar for most people.  For now let me arrange the categories into a table with some defining characteristics:

What is Labor

When I was 10 years old I did a paper route.  I got paid six cents a paper.  That’s labor.  A few years later a math professor hired me as a math guinea pig.  He wanted me to do all of the math problems in a textbook he was writing.  That’s labor.  Not to mention the most boring summer job ever. 

These days I provide legal services.  That’s labor.  I help people invest their money.  Also labor.

What’s Good with Labor

Most people earn most of their money from labor.  Labor is the only way to make money when you start out in the world.  There’s a low barrier to entry.  Even if your only skill is digging holes in the ground, you can find someone willing to pay for it.  As you develop skills your labor becomes more valuable.  A doctor makes more than a ditch digger, for example. 

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This is the first post of the Wise Money Decisions blog.  I want to lay out the purpose for this blog and set the stage for what’s to come. 

My Big Goal

When I started my career, I set the goal to be in a position to retire within 20 years.  Not that I will retire.  But that I will have the choice.  And I don’t mean retirement in the geriatric-Florida-Medicare Plan B kind of way.  For me, retirement means freedom from the need to work.  If and when I achieve my goal, I would thereafter work only if I enjoy it and not because I need the money.  I would spend more time doing things I choose to do, and less time doing things I have to do.  I would spend more time with my family, reading, traveling, writing music, and helping others.  I would spend less time working.  And I would never have to tolerate a job just because I need the money! 

In order to retire in 20 years, I need to have enough saved up that I can generate a lot of passive income from things like interest and dividends.  When most financial planners calculate how much you need to save for retirement, they assume you will draw down a portion of your savings each year. 

I make my retirement projections a little differently.  I don’t intend to draw down my savings in retirement.  When I kick the proverbial bucket I intend to leave to my kids about the same amount that I retired with.  If they’re lucky.

What are the pros and cons of calculating my retirement this way? 

Advantage:  I can live until 100 and never run out of money.  I can invest more aggressively during retirement because I have a large cushion.

Disadvantage:  I need to save more for retirement than most people.   

And there’s one more upside.  I’ll have something to leave to the world when I die.  I’d like to leave enough to my wife and kids that they’ll always think kindly of me, but not so much that they’ll pull the plug early. 

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